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Formation of company

1.
Formation of a companyFormation of a company
Promoter is a person who bringsPromoter is a person who brings
about the incorporation andabout the incorporation and
organization of a corporationorganization of a corporation

2.
Promoter’sPromoter’s
 Before the company is formed certainBefore the company is formed certain
preliminary steps are necessarypreliminary steps are necessary
 e.g.: whether it should be a private company or ae.g.: whether it should be a private company or a
public company, what its capital should be , andpublic company, what its capital should be , and
whether it is worthwhile forming a new companywhether it is worthwhile forming a new company
or taking over the business of an alreadyor taking over the business of an already
established concern ,all these steps are takenestablished concern ,all these steps are taken
by certain person known as “promoters". Theyby certain person known as “promoters". They
do all the necessary preliminary work incidentaldo all the necessary preliminary work incidental
to the formation of a company.to the formation of a company.

3.
Incorporation of a companyIncorporation of a company
 Mode of a forming incorporatedMode of a forming incorporated
company(sec.12)company(sec.12)
 Any 7 or more persons (2 or more in the case ofAny 7 or more persons (2 or more in the case of
a private company) associated for any lawfula private company) associated for any lawful
purpose may form any incorporated company ,purpose may form any incorporated company ,
with or without limited liabilities . They shallwith or without limited liabilities . They shall
subscribed their names to a memorandum of asubscribed their names to a memorandum of a
association and also comply with otherassociation and also comply with other
formalities in respect of registration .formalities in respect of registration .

4.
A company so formed may be ;A company so formed may be ;
 A company limited by share, orA company limited by share, or
 A company limited by guarantee, orA company limited by guarantee, or
 An unlimited company .An unlimited company .

5.
The promoters have certain basicThe promoters have certain basic
duties towards the company formedduties towards the company formed
 He must not make any secret profits outHe must not make any secret profits out
of the promotion of the companyof the promotion of the company
 He must make full disclosure to theHe must make full disclosure to the
company of all relevant facts including tocompany of all relevant facts including to
any profit made by him in transaction withany profit made by him in transaction with
companycompany

6.
Promoter may be rewarded by thePromoter may be rewarded by the
company for efforts undertaken bycompany for efforts undertaken by
him in forming the company inhim in forming the company in
several waysseveral ways
 The company may to pay some remunerationThe company may to pay some remuneration
for the service renderedfor the service rendered
 The promoter make profits on transactionThe promoter make profits on transaction
entered by him with the company after makingentered by him with the company after making
full disclosure to the company and itsfull disclosure to the company and its
membersmembers
 The promoter may sell his properties for fullyThe promoter may sell his properties for fully
paid shares in the company after making fullpaid shares in the company after making full
disclosuredisclosure

7.
Memorandum of associationMemorandum of association
 The first step in the formation of aThe first step in the formation of a
company is to prepare memorandum ofcompany is to prepare memorandum of
association. “memorandum" means theassociation. “memorandum" means the
memorandum of association of a companymemorandum of association of a company
as originally framed or as altered fromas originally framed or as altered from
time to time in pursuance of any previoustime to time in pursuance of any previous
companies law or of the companies act,companies law or of the companies act,
19561956

8.
 A fundamental document. TheA fundamental document. The
memorandum of association is a documentmemorandum of association is a document
of great importance in relation to theof great importance in relation to the
proposed company. It contains theproposed company. It contains the
fundamental condition upon which alone thefundamental condition upon which alone the
company is allowed to be incorporated. Thecompany is allowed to be incorporated. The
MoA consists of :MoA consists of :
 1. Name clause1. Name clause
 2. Regd office clause2. Regd office clause
 3. Objects clause3. Objects clause
 4. Capital clause4. Capital clause
 5. Liabilities clause.5. Liabilities clause.

9.
Doctrine of ultra virusDoctrine of ultra virus
 The company should devote itself only toThe company should devote itself only to
the objects set out in the memorandumthe objects set out in the memorandum
and to no others. It is the function of theand to no others. It is the function of the
memorandum to delimit and identify thememorandum to delimit and identify the
objects in such plain manner as that theobjects in such plain manner as that the
reader can identify the objects in a plainreader can identify the objects in a plain
and unambiguous manner. Anyand unambiguous manner. Any
transaction which is outside the scope oftransaction which is outside the scope of
the powers specified in the objects clausethe powers specified in the objects clause

10.
 is ultra vires and therefore it is void.is ultra vires and therefore it is void.
 Ultra vires means beyond the powers.Ultra vires means beyond the powers.
 The consequences of an ultra vires are:The consequences of an ultra vires are:
 1. company cannot sue or be sued1. company cannot sue or be sued
 2. Directors are held personally liable to2. Directors are held personally liable to
the outsiders for an ultravires.the outsiders for an ultravires.

11.
Articles of associationArticles of association
 The article of association or just articlesThe article of association or just articles
are the rules, regulation and bye-law forare the rules, regulation and bye-law for
the internal management of the affairs of athe internal management of the affairs of a
company. They are framed with thecompany. They are framed with the
objects of carrying out the aims andobjects of carrying out the aims and
objects as set out in the memorandum ofobjects as set out in the memorandum of
associationassociation

12.
 The article of company usually containThe article of company usually contain
provision relating to the following mattersprovision relating to the following matters
 1.share capital, rights of share holders,1.share capital, rights of share holders,
variation of these rights, payments ofvariation of these rights, payments of
underwriting commissionunderwriting commission
 2.lien on share2.lien on share
 3.calls on shares3.calls on shares
 4.transfer of shares4.transfer of shares
 5.tramission of shares5.tramission of shares
 6.forfeiture of shares6.forfeiture of shares

13.
Constructive notice ofConstructive notice of
memorandum and articlesmemorandum and articles
 Every outsider dealing with a company isEvery outsider dealing with a company is
deemed to have notice of the contents ofdeemed to have notice of the contents of
the memorandum and the articles ofthe memorandum and the articles of
association. this documents , andassociation. this documents , and
registration with the registrar, assume theregistration with the registrar, assume the
characters of public documents.characters of public documents.

14.
Doctrine of indoor managementDoctrine of indoor management
 There is a one limitation to the doctrine o0fThere is a one limitation to the doctrine o0f
constructive notice of the memorandum and theconstructive notice of the memorandum and the
articles of a company. The outsider dealing witharticles of a company. The outsider dealing with
the company are entitled to assume that as farthe company are entitled to assume that as far
as the internal proceeding of the companyas the internal proceeding of the company
concerned, everything has been regularly done.concerned, everything has been regularly done.
They are presumed to have read this documentThey are presumed to have read this document
and to see that the proposed dealing is notand to see that the proposed dealing is not
inconsistent their with, but they are bound to doinconsistent their with, but they are bound to do
more ;they need not inquire in to regularity of themore ;they need not inquire in to regularity of the
internal proceeding as required by theinternal proceeding as required by the
memorandum and the articles. They canmemorandum and the articles. They can
presume that all is been done regularly.presume that all is been done regularly.

15.
prospectusprospectus
 a prospectus, as “any document described ora prospectus, as “any document described or
issued as prospectus and includes any notice,issued as prospectus and includes any notice,
circular, advertisement or other documentcircular, advertisement or other document
inviting deposits from the public or inviting offersinviting deposits from the public or inviting offers
form the public for the subscription or purchaseform the public for the subscription or purchase
of any shares in, or debentures of, a bodyof any shares in, or debentures of, a body
corporate.” in simple words, any documentcorporate.” in simple words, any document
inviting deposits form the public or inviting offersinviting deposits form the public or inviting offers
form the public for the subscription ofform the public for the subscription of
debentures of a company is a prospectusdebentures of a company is a prospectus